A Dangerous Staring Contest

There was always an assumption that the Europeans would do what is necessary to preserve the union, the banks, and the countries that are a part of it.

The assumption seems to be unraveling before our eyes.

The unraveling makes more sense than the containment even though the consequences are unfathomable. That's because, in fits and starts, we are seeing a simple outline of the German point of view: The ECB has no ability to control the finances of any country and it has no ability to tax people to finance the printing presses, so what is the point of trying to save the system?

The fatalists seem to be taking over. What's the fatalist game plan? Let the markets take care of themselves and let's see what happens.

Here's my take on the fatalists' game plan. It is terrific if you are 100% short everything except the dollar, until they come for us then you have to be 100% short everything.

There's no two ways around it. This is the corollary to what I suggested yesterday, that you have now become stupid if you buy anything.

The Germans are the fatalists here. They now think that the printing presses lead to Weimar no matter what, and given the lack of fiscal austerity in the countries' finances that they would be papering over, you can see their point. The fatalists would rather have destruction of capital by deflation than by inflation.

The fatalists think this because they now know that destruction is occurring either way. To them we have moved past the point of no return. To the fatalists you can get out of a no-growth, no-discipline environment in two ways: printing presses or collapse of the institutional framework of sovereign debt and those who hold it -- talk about a Morton's fork. They are going for the latter. They would rather have a collapse of the system at the hands of the market than a collapse of the system at the hands of hyperinflation.

So, here's where we are. If the fatalists win, we have to go back to Dow 8000, where I feared we would go when the fatalists looked like they would win at the end of September. If the fatalists lose, we can hold it together and muddle through here, although their currency will go down to parity and their problems will be worked out of over time in a way that transfers wealth to the poorer nations in return for risk to the wealthy, which the fatalists have decided is too unpalatable.

Thus in one fell swoop of a Spanish auction, the fatalists are making it known that they would rather choose the unknown of the market than the known of hyperinflation. The idea that they could potentially bring down the Western world of finance -- even if it is just for six months as everyone adjusts here but whole nations get crushed there -- is appealing to them. Because the fatalists know it is going to happen anyway so they would rather just get going with it.

I think the fatalists regard both paths as potentially suicidal but in the "let the market decide" they have a better chance of coming back faster from the apocalypse than letting the central bank print money it doesn't have. They recognize the problem is too big and too out-of-control to do anything else.

Looks like Angela "Lucy" Merkel has taken the ball away for good and told Charlie Brown to go home. It didn't have to be this way. The Europeans had their chance. To the fatalists, they blew it.

And now we all have to suffer, with the U.S. coming out of it down the road, and maybe the Germans, and the rest to fend for themselves. Triple-AAA preservation for the French?